Dynamic Pricing for Non-fungible Resources
Public blockchains implement a fee mechanism to allocate scarce computational resources across competing transactions. Most existing fee market designs utilize a joint, fungible unit of account (e.g., gas in Ethereum) to price otherwise non-fungible resources such as bandwidth, computation, and storage, by hardcoding their relative prices. Fixing the relative price of each resource in this way inhibits granular price discovery, limiting scalability and opening up the possibility of denial-of-service attacks.
  • Theo Diamandis,
  • Alex Evans,
  • Tarun Chitra,
  • Guillermo Angeris
  • Basics
 08.16.22
Optimal Routing for Constant Function Market Makers
We consider the problem of optimally executing an order involving multiple cryptoassets, sometimes called tokens, on a network of multiple constant function market makers (CFMMs). When we ignore the fixed cost associated with executing an order on a CFMM, this optimal routing problem can be cast as a convex optimization problem, which is computationally tractable. When we include the fixed costs, the optimal routing problem is a mixed-integer convex problem, which can be solved using (sometimes slow) global optimization methods, or approximately solved using various heuristics based on convex optimization. The optimal routing problem includes as a special case the problem of identifying an arbitrage present in a network of CFMMs, or certifying that none exists.
  • Guillermo Angeris,
  • Tarun Chitra,
  • Alex Evans,
  • Stephen Boyd
  • MEV
 12.01.21
Replicating Monotonic Payoffs Without Oracles
In this paper, we show that any monotonic payoff can be replicated using only liquidity provider shares in constant function market makers (CFMMs), without the need for additional collateral or oracles. Such payoffs include cash-or-nothing calls and capped calls, among many others, and we give an explicit method for finding a trading function matching these payoffs. For example, this method provides an easy way to show that the trading function for maintaining a portfolio where 50% of the portfolio is allocated in one asset and 50% in the other is exactly the constant product market maker (e.g., Uniswap) from first principles. We additionally provide a simple formula for the total earnings of an arbitrageur who is arbitraging against these CFMMs.
  • Guillermo Angeris,
  • Alex Evans,
  • Tarun Chitra
  • DeFi
 09.01.21
Constant Function Market Makers: Multi-Asset Trades via Convex Optimization
The rise of Ethereum and other blockchains that support smart contracts has led to the creation of decentralized exchanges (DEXs), such as Uniswap, Balancer, Curve, mStable, and SushiSwap, which enable agents to trade cryptocurrencies without trusting a centralized authority. While traditional exchanges use order books to match and execute trades, DEXs are typically organized as constant function market makers (CFMMs). CFMMs accept and reject proposed trades based on the evaluation of a function that depends on the proposed trade and the current reserves of the DEX. For trades that involve only two assets, CFMMs are easy to understand, via two functions that give the quantity of one asset that must be tendered to receive a given quantity of the other, and vice versa. When more than two assets are being exchanged, it is harder to understand the landscape of possible trades. We observe that various problems of choosing a multi-asset trade can be formulated as convex optimization problems, and can therefore be reliably and efficiently solved.
  • Guillermo Angeris,
  • Akshay Agrawal,
  • Alex Evans,
  • Tarun Chitra,
  • Stephen Boyd
  • Basics,
  • DeFi
 07.01.21
Replicating Market Makers
We present a method for constructing Constant Function Market Makers (CFMMs) whose portfolio value functions match a desired payoff. More specifically, we show that the space of concave, nonnegative, nondecreasing, 1-homogeneous payoff functions and the space of convex CFMMs are equivalent; in other words, every CFMM has a concave, nonnegative, nondecreasing, 1-homogeneous payoff function, and every payoff function with these properties has a corresponding convex CFMM. We demonstrate a simple method for recovering a CFMM trading function that produces this desired payoff. This method uses only basic tools from convex analysis and is intimately related to Fenchel conjugacy. We demonstrate our result by constructing trading functions corresponding to basic payoffs, as well as standard financial derivatives such as options and swaps.
  • Guillermo Angeris,
  • Alex Evans,
  • Tarun Chitra
  • DeFi
 03.01.21
A Note on Privacy in Constant Function Market Makers
Constant function market makers (CFMMs) such as Uniswap, Balancer, Curve, and mStable, among many others, make up some of the largest decentralized exchanges on Ethereum and other blockchains. Because all transactions are public in current implementations, a natural next question is if there exist similar decentralized exchanges which are privacy-preserving; i.e., if a transaction’s quantities are hidden from the public view, then an adversary cannot correctly reconstruct the traded quantities from other public information. In this note, we show that privacy is impossible with the usual implementations of CFMMs under most reasonable models of an adversary and provide some mitigating strategies.
  • Guillermo Angeris,
  • Alex Evans,
  • Tarun Chitra
  • Privacy
 02.01.21
Optimal Fees for Geometric Mean Market Makers
Constant Function Market Makers (CFMMs) are a family of automated market makers that enable censorship-resistant decentralized exchange on public blockchains. Arbitrage trades have been shown to align the prices reported by CFMMs with those of external markets. These trades impose costs on Liquidity Providers (LPs) who supply reserves to CFMMs. Trading fees have been proposed as a mechanism for compensating LPs for arbitrage losses. However, large fees reduce the accuracy of the prices reported by CFMMs and can cause reserves to deviate from desirable asset compositions. CFMM designers are therefore faced with the problem of how to optimally select fees to attract liquidity. We develop a framework for determining the value to LPs of supplying liquidity to a CFMM with fees when the underlying process follows a general diffusion. Focusing on a popular class of CFMMs which we call Geometric Mean Market Makers (G3Ms), our approach also allows one to select optimal fees for maximizing LP value. We illustrate our methodology by showing that an LP with mean-variance utility will prefer a G3M over all alternative trading strategies as fees approach zero.
  • Guillermo Angeris,
  • Tarun Chitra,
  • Alex Evans,
  • Stephen Boyd
  • DeFi
 01.04.21
Liquidity Provider Returns in Geometric Mean Markets
Geometric mean market makers (G3Ms), such as Uniswap and Balancer, comprise a popular class of automated market makers (AMMs) defined by the following rule: the reserves of the AMM before and after each trade must have the same (weighted) geometric mean. This paper extends several results known for constant-weight G3Ms to the general case of G3Ms with time-varying and potentially stochastic weights. These results include the returns and no-arbitrage prices of liquidity pool (LP) shares that investors receive for supplying liquidity to G3Ms. Using these expressions, we show how to create G3Ms whose LP shares replicate the payoffs of financial derivatives. The resulting hedges are model-independent and exact for derivative contracts whose payoff functions satisfy an elasticity constraint. These strategies allow LP shares to replicate various trading strategies and financial contracts, including standard options. G3Ms are thus shown to be capable of recreating a variety of active trading strategies through passive positions in LP shares.
  • Alex Evans
  • DeFi
 06.01.20
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Our Comment on The SEC’s Proposed Custody Rule

05.09.23

This week, we submitted a comment in response to the SEC’s proposed custody rule, together with Dragonfly Capital, Electric Capital, Haun Ventures, and Ribbit Capital.

While we are supportive of efforts to modernize the custody rule, we respectfully encourage the SEC to consider our comments to revise the proposal in key areas and urge the SEC to carefully consider how the proposal will work in practice before adopting a final rule.

Market participants have invested substantial time, energy and capital into developing safe and secure custody solutions for crypto assets. To protect investors without hindering the ability of RIAs to fulfill their fiduciary duties to clients, we believe the rule should incorporate industry best practices and remain adaptable to advances in technology.

In particular, we believe the proposal should:

  • Permit RIAs to self-custody crypto assets when there is no available qualified custodian
  • Allow pre-funding of accounts on trading platforms, without the platform itself needing to be a qualified custodian provided certain conditions are met
  • Keep the definition of “qualified custodian” as-is and not narrow it to federally regulated banks.

Safeguarding crypto assets is critical. But any proposed rule in this area must be properly balanced against the risk of stifling emerging technology. We appreciate the opportunity to comment and respectfully encourage the SEC to consider our recommendations (and those of our peers) to revise the proposal.

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